Feds finalize rules to clean up mortgage servicers

WASHINGTON (MarketWatch) — A federal regulator released final rules on Thursday aiming to force companies that handle mortgage payments to deliver clear information about costs and deal fairly with struggling borrowers.

The federal Consumer Financial Protection Bureau’s rules say that servicers, companies that collect borrowers’ payments for loan owners, must provide regular statements that detail a payment’s principal, interest, fees, and escrow components. Servicers must also warn borrowers before the interest rate changes on adjustable-rate mortgages, among other actions.

Following abuses revealed in the wake of the financial crisis, the CFPB is looking to clean up the sorts of servicer practices that made life even tougher for already struggling homeowners.

“Many servicers failed to provide the basic level of customer service that borrowers deserve, costing them money and dumping them into foreclosure. Dealing with sloppy mortgage servicing became a frustrating nightmare,” said Richard Cordray, CFPB’s director, in prepared remarks. “Servicers failed to answer phone calls, routinely lost paperwork, and mishandled accounts...At times people arrived home to find they had been unexpectedly locked out.”

For people facing foreclosure, the CFPB’s rules restrict servicers from starting foreclose proceedings on borrowers who have already applied for an alternative solution, such as a loan modification, when that application is pending. Banning this practice, known as “dual tracking,” is key, consumer advocates say.

Additionally, servicers must wait until a mortgage account is more than 120 days delinquent before making a first foreclosure process notice or filing, among other actions.

The CFPB has exempted small servicers, those handling no more than 5,000 mortgages, from certain requirements. Industry participants had asked the CFPB to define small servicers as those handling no more than 10,000 loans.

The rules are scheduled to take effect in January 2014. Industry officials had requested an implementation timeline of up to two years. Consumer advocates say the implementation delay is too long, and that some lenders may accelerate foreclosures to beat the new deadline.

“CFPB is providing mortgage servicers advance notice to do their dirty work before the new regulations go into effect,” said Bruce Marks, chief executive of the Neighborhood Assistance Corporation of America, a nonprofit advocacy and counseling agency. “When the new servicing rules go into effect in 2014 the landscape will be very different with many more communities devastated due to CFPB’s failure as the consumer watchdog.”

The CFPB’s rules come after a $25 billion servicing-and-foreclosure-abuse settlement last year between state attorneys general, the federal government and Bank of America
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JPMorgan Chase
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Wells Fargo
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Citigroup
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and Ally Financial
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Reshaping the mortgage market

The servicing rules are the CFPB’s latest attempt to clean up the mortgage marketplace for consumers. Last week the regulator announced new final rules to force lenders to consider a borrower’s ability to repay a loan. Read more about new rules on safer mortgages.

The CFPB was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act, a far-reaching bank-reform bill U.S. lawmakers approved in the aftermath of the financial crisis. The CFPB is charged with banning unfair and deceptive products and services, and supporting financial education, among other goals.

“Our new rules announced today are designed to give strong protections to struggling borrowers. In this market, as in every other, consumers have the right to expect information that is clear, timely, and accurate,” Cordray said. “When it comes to mortgage servicing, they also deserve a fair process. This is all the more true given the high stakes for consumers and the central importance of homeownership in our society.”

Industry participants have been concerned about costs for the new rules on disclosures and periodic statements. According to an October comment letter from the American Bankers Association, borrowers already have access to detailed information on their loans in federal tax documents and annual escrow statements, among other sources.

“Due to the extensive costs that these additional requirements would impose on thousands of mortgage servicers, we do not believe that there would be a net benefit for consumers to providing this same information on a periodic statement,” according to the ABA.

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